Executive summary
The essay discusses the background information about India and elaborates on her demographic information, economic status, legal systems, and political status. Furthermore, some reasons India is suitable for investing have been discussed. Furthermore, the essay has reviewed the political economy of India, which is the legal, economic and political systems, and critically discussed India’s attractiveness for foreign direct investment. Political economy has analyzed the benefits, risks, and costs of the legal, economic and political systems before giving some recommendations.
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Introduction
India is situated in Asia and is the seventh largest country globally by area. Moreover, India has more than 1.2 billion people, making it the second most populous country. The economy of India is ranked at eleventh largest globally by nominal GDP (Demography of India: Part 1, 1998). Furthermore, by purchasing power parity, it is the third largest. Indian society is a multi ethic, multi-lingual, and pluralist. The Indian republic is governed by federal constitution under a parliamentary system of 28 states (MacDonald, 2009). India is a good investment site because of its economy’s maximum benefits, minimal costs, and risks. Furthermore, the country balances its political, economic, and legal factors well, making it conducive for business. The essay will analyze the political economy of India by comparing the political, legal, and economic systems of India. Moreover, it will give recommendations and finally conclude with a
Political Economy Analysis
Political economy is how economic methods and theory influence political ideology. It is the interplay between politics, law, and economics and how different institutions develop in different economic and social systems, such as communism, socialism, and capitalism (Mill & Ashley, 2005). Furthermore, it analyzes how public policies are created and implemented. Walker (2008) pointed out that since different groups and individuals have different interests in how an economy or a country should be developed, political economy covers a broad spectrum of competing interests. Moreover, it involves application of game theory, since competing groups for power and finite resources must decide the course of action will produce the most beneficial outcome.
The significance of using political economy in analyzing India is to evaluate the worthiness of India as an investment destination for international businesses and investors.
2.1 Political System
Benefits
Citizens of India are often mobilized in social groups; that are religion, community or caste, during election times to give them collective electoral power (Lee-Warner, 2006). Moreover, until now, subordinate social groups have emerged to be politically relevant at the state level. This is a welcomed expansion of political democracy and equality in India.
Risks
The Indian society is heterogeneous, leading to religious action” problems. This hampers decisions and actions that need to be taken collectively. Furthermore, the proliferation of regional and small parties in the coalition government have meant catering for particularistic demands; this overrides coordination of the long-term goals in the country (Guha & Raghuraman, 2007). Additionally, vital economic issues in India do not get salience in the mobilization of the electorate, which poses a risk.
Costs
According to Vidyarthi (1997), it is difficult and costly in India to agree on a goal, coordinate, and get actions done to achieve a goal because the population is heterogeneous. Moreover, it is costly to the country when specific leaders perceived to uphold the dignity of a marginalized caste group may be reelected even if their policies negatively affect the country.
2.2 Economic System
Benefits
One benefit of India’s economic system is that business people, professionals, and salary earners constitute the heads of approximately 22% of households (McClellan, 2010). This is a significant percentage that drives the Indian economy. Furthermore, according to Ghosh (2013), the economy of India is liberated, but the government controls assets, production, and employment in most non-agricultural organized sectors.
Risks
One of India’s economic system risks is unequal wealth distribution. The regional governments are also increasingly becoming fiscal dependent on the central government (Banerjee, 2004). The increased regional competition and economic liberalization have increased the disparity between backward and economically advanced states
Costs
Poor infrastructure has hindered economic growth in India, which is costly to the Indian economy. Moreover, substantial investment in public infrastructure takes a long time to fructify (Singh et al., 1998). Another cost to the economic system of India is that some regional governments cater to different particularistic demands from different parties. This makes them to be near fiscal bankrupt (Ghosh, 2013).
2.3 Legal System
Benefits
One of the benefits of legal systems in India is the fragmentation of the states gives the central state more autonomy. The state, over the years, has accumulated great power in direct regulation and ownership of the economy. Moreover, India has been powerful in its interventionist and regulatory role (Bhansali, 1992).
Another benefit is the decentralization and federalism of the resources, which has made the government more responsive to the needs of the locals. Moreover, the 73rd and the subsequent 74th amendment of the constitution in the early 1990s gave some potency to the decentralization movement below the state level, up to the gram panchayats (Pandey, 1993)
Risks
One potential risk of the legal systems in India is the astute political leadership of the country which can play off the groups against each other and earn special privileges and powers. Moreover, there are tradeoffs between accountability and credibility in state affairs which is risky
Costs
The fragmentation of different groups in India, with each group pulling in a different legal system, is the country’s policies are buffeted around, which forms are halted and hesitated (Bhansali, 1992). This is costly to the country. Moreover, inequality and heterogeneity in India have made it difficult and costly to coordinate long-term policies.
Major Indian states are large and the governments are distant from the local people. Furthermore, few administrative functions and fewer independent finance sources have been decentralized to the local governments, making the legal systems costly.
Recommendations
- The state government should reorient its functions from control and ownership of business enterprises towards more on basic social services, education and health for the poor.
- As much as the state is the major financier of these services, it should contract private-public partnerships or the private sectors to provide some services. It should not be managed bureaucratically.
- Political awareness and land reforms in the states should be enhanced to prevent oligarchic local elites capture and control of the local governments.
- The regional governments should also be more responsible fiscally and accountable at the panchayat level. This will deepen democracy, weaken local oligarchy powers, expand education, and devolve finances.
- Regular auditing and making media and local NGO’s as local governments watchdogs will also eradicate corruption
Conclusion
India is attractive and is a good investment and market site. The overall attractiveness of India as a direct foreign investment is because of its three key pillars; the country’s benefits, costs, and risks. The country’s overall attractiveness as a potential investment or market size for an international business largely depends on how the country balances the benefits, risks, and costs associated with doing business in that particular country (Rajan, 2009).
Kobayashi-Hillary (2005) indicated that the long term monetary benefits of the international businesses in doing business in India make the country attractive. This is because of her large market size, her purchasing power which reflected the wealth of the consumers, and the future consumer’s wealth.
Cost-wise, several legal, economic and political factors determine the running costs of doing business in India. India is politically stable, has a vibrant and improving economy, and has infrastructures and other supporting businesses. This makes India attractive as an investment destination cost-wise. For the legal factors, India has local regulations and laws that liberalize the market. Businesses have no strict standards to protect intellectual property rights (Nagesh et al., 1998).
Risk-wise, India has stable political, legal, and economic factors that minimize business risks. According to Acharya (1998), minimal political forces can cause drastic changes in the country’s business environment and adversely affect the profits of international investors. Furthermore, India has a growing business environment that cannot hurt the goals and profits of an international business enterprise. The legal factors are also stable to protect firms from stealing intellectual property rights and breaking of contracts.
References
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